(Yicai Global) Oct. 8 -- China's central bank plans to cut the reserve required ratio by one percentage point next week, releasing about CNY1.2 billion (USD175 billion) in liquidity and marking the fourth reduction so far this year.
The People's Bank of China will trim the rate, which determines how much cash institutions must hold at the central bank, for large, joint-stock, city and non-country rural banks, as well as foreign lenders, it said in a statement yesterday. Some CNY450 million of the money will be used to pay off medium-term lending facilities that mature on Oct. 15.
China has made several reductions this year to support the domestic economy amid heightened trade tensions with the United States, with Chinese firms now facing American import tariffs on USD250 billion worth of goods.
The main purpose of the cut is to optimize the liquidity structures of commercial banks and the financial market and to reduce financing costs, a spokesperson from the bank said in a press release the same day. It is a targeted adjustment and banking liquidity is basically stable, he added, saying China's prudent monetary policy has not changed.
Several analysts had forecast the reduction, with Ming Ming, chief fixed income analyst at Citic Securities, saying several times earlier this year there would be two rate cuts this year and that one of them would come right after China's National Day holiday, a week-long celebration of the foundation of the People's Republic of China.
Cutting the rate is a necessity if monetary policy is to play a structural role and support the real economy, he told Yicai Global yesterday. The move should make financing more accessible for small- and medium-sized enterprises, which Ming says have been struggling to borrow or paying high rates to do so this year.
Lu Zhengwei, chief economist at the Industrial Bank, also predicted in late September that another rate cut was imminent. In a document published by the Chinese cabinet, he said that "improved target RRR cuts, credit policy supported refinancing and other monetary policy tools will be used to guide funds to invest more in innovative enterprises and smaller companies."
Yuan Is Safe
The cut will promote economic restructuring and high-quality development, strengthening the yuan's fundamentals and supporting its exchange rate, an executive at PBOC said. China is a large-scale developing economy which has strong exports but is driven by domestic demand, so the yuan rate can remain stable, he added, saying the central bank will keep looking to stabilize market expectations and the foreign exchange market.
China's monetary policy orientation will also remain unaffected, according to Wen Bindui, chief researcher at China Minsheng Bank. The cut will enable institutions to get stable long-term funds and manage their assets and liabilities, he said, adding that it will reduce costs for lenders and therefore the real economy, maintaining the country's prudent and neutral monetary policy.
Editor: James Boynton